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ADDRESS june *9, 1948.byMR. UaB&IMXK 5. ECCLES MemberFEDERAL RESERVE BQ*RD Washington, D. C.

My friend Charley, President %reng, Ladles, Fellow Bankers, you have been

good enough to invite me to attend the Utah State Bankers meeting as a speaker

I think every year over the past 14 years wnile I have been away from here, and

I have felt that it was impossible for me to be present until this particular

time. Congress was usually in session, and as long as I «as the Chairman of

the Federal Reserve Board 1 found it difficult to get away. This year with

Congress out of session and with a changed status I found it easier to accept

your invitation, and I can assure you that I do not know of an invitation thet

I would prefer accepting to the invitation of this Association, being, as

Charley has said a product of Utah, and having at one time been President of

this Association, I think it was in 1924. For you who do not remember that

long ago I will remind you that I had the distinct honor to be President of the

Utah State Bankers Association, so after a period of 24 ye^rs it gives ite

pleasure to address you today.

As you all know, I was put somewhat (I have related this before) in the

position that Lord Keynes stated of Lord Catto, the Governor of tne Bank of

England. Mien the Labor Party went into power in England, Lord Catto said to

Lord Keynes, *Mow that Labor has come into power I suppose they will chop ay

head off."

Lord Keynes said to him, *Tes, they will chop your hecvd off, but they

will put it bacK on with a tilt to the left.* (Laughter)

I am not sure whether I am in a more or a less fortunate position than

Lord Catto. They did cut his he^d off, and I suppose put it on with a tilt to

the left. Mine was not entirely severed; Just, I suppose, left dangling, and

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as to the tiit, I feel pretty sure that neither this nor any other administration

would h**ve very ouch influence in changing the tilt. Over & long period of

years I have at least felt that I knew the tilt that it should bear. There ar#

times, I think, when our economic and social trends sight veer too far to the

left and need to be brought back, and times when they veer too far to the right

and need to be brought back. I try to stay on that even course so that I do

not have to be tilted one way or the other. If we could keep the economy on

such a course, if we could avoid booms and depressions, we would be better off.

I have related another incident quite a number of times that I think is

a pretty good story on me. My associate and assistant, Mr. Elliott Thurston,

who is a very charming person and has a marvelous sense of humor, and I were

together one evening and I was speaking off the record to tne editors of the

McGraw Hill Publishing Co. organization. They had about 50 or 60 editors and

I knew a lot of those fellows, and while we were eating (before I had made my

speech) I leaned over to Mr. Thurston and said,“Elliott, have 1 ever spoken to

this group before? I seem to know quite a number of them.*

And he said, “Mr. Chairman, I am quite sure you haven*t, because if you

had I donft think you would be here tonight. 8 (Laughter)

So maybe if I had spoken to this group within recent years they would not

have been eo good as to continue to invite me every year. But be that as it may,

I am glad to be here.

In reflecting upon the paet, we should learn to profit from our past

mistakes. I must say that this generation, or at least I would say my vintage,

has not a very good record of past performance. It is pretty difficult for us

to say to the present younger generation who we sometimes think are becoming

too radical, that they should follow us. Our record is a record of two ware-—


on© v*as not enough — ana a. record of t*o very serious depressions, and the

way we seem to be headed at the present time would indicate that we have

learned absolutely nothing from the past experience. One war, which at the

time seemed to be a pretty serious one, and we spoke of it as a World liar,

by comparison with the second war, that we have not started to recover from,

seems pretty insignificant.

The first depression brought the end of a good many banks in Utah and

Idaho, as I recall. I was at that time (in 1920) the President of the

First National Bank of Ogden, and I well remember the deflationary pressures*

However, that depression by comparison with the depression from 19^9 up until

1940, when it seemed to take a military program of huge governmental expendi

tures to enable us to utilize our idle man power and our idle facilities, mads

the depression of the first iorld ftar seem very insignificant. I am wondering

if as time goes on, that, based upon the past, »e are to have bigger and better

depressions in the future and bigger and better wars? It certainly seems to be

the trend that we are following, but I am not g'oing to undertake to give all

the answer to the ways and m e m s of preventing wars and depressions.

The problems I am goi-ig to discuss are extremely difficult and extremely

complex. Their solution aaist be based upon a greater degree of enlightened self-

interest than we have ever manifested* The solution is not going to be brought

about by *hat we consider less government and more free enterprise, by less

planning and more of l&issez faire. I am sure that that is not the direction

in which we are going, that no political change is going to change tne basic

economic and social direction this country is taking. Certainly a further

inflationary development, a development that is permitted to run its course,

and then & liquidation that will develop as a result, is not going to mean

less government, irrespective of the political philosophy of any party.

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The great danger inherent in a further inflationary development or further

expansion of credit, further creation of money, is the degree to wnich the

Government will nave to intervene, and they will intervene at the request

of the very people who today want the Government to abidcate. This will happen

when the process of credit deflation, which is cyclical, gets under way, when

unemployment begins to mount, prices begin to collapse, and bankruptcy becomes

widespread, ihen those conditions develop they *re not self-correcting. !e

saw from 19^9 to 1933# at the time of the bank holiday, that the further

deflation went the less solvent tne entire country bec&me. I do not believe

that any Government will permit tne deflationary process to run its course

to the extent thct the cfeflation went after 19^9• I do not think that is

possible again — I hope it isn*t — and in order to prevent it tne Govern

ment will intervene sooner o.nd they will intervene on an expanding scale;

therefore, for tnose of us wno liite to preserve as much of the free enterprise

system as possible, it behooves us to prevent, insofar as we can a further

inflationary development, because I am sure that we woula like to avoid

insofar as possible extensive governmental intervention brought about by

depression.

Speaking of wnat has brought as to our present impasse, primarily it

was the war. We could not over a period of 5 years, expend over 400 billion

dollars and only pay for about 40 per cent of that expenditure and borrow

the rest of it without creating a very substantial basis of inflation. As

we ioaow, the Government paid for about 40 per ce.it of the war through

taxation, and it paid for the other 60 per cent, a very substantial part

of it, by borrowing from the banking *yetem. In it was borrowed from in

dividuals and corporations was not inflationary because that did not increase

or expand the supply of money. The supply of money was expanded only to the

extent that the Government's war deficit was financed out of bank credit.


I am sure we, as bankers, aaist know t h a t bank credit is the source of our

money supply, that whenever a loan is made new money comes into existence, and

as a result of the expansion of credit to the Government during the war the

deposits of the banking system and currency in circulation increased about

300 per cent, The offset to that great deposit growth in the banking system

was Government bonds held by the banks. The bond portfolio of the banking

system at one time exceeded 60 per cent of their total deposits, whereas their

total of other loans and investments was 25 per cent and less. How that was

an expansion of tne means of payment in the hands of the oublic t h a t caused

the supply of goods and services available for the public to be inadequate.

That is what inflation is.

The reason you did not have overall inflation during the war was because

of a harness of controls that tne Government imposed that made it impossible

for the public to spend the money that they got as a result of the Government*s

expenditures in order to carry on the war* That is one reason that during the

war period so much of the money that the oublic got went into Government bonds.

They couIdnH spend, it, and therefore so much of it went into banks and became

increased deposits of corporations and individuals— idle money, a great deal

of it.

Khen the war was over it was apparent, or should hove been apparent to

everyone, that the need of controls was much greater, if anything, than during

the war. lith the war over, there was no real incentive for people to buy

Government securities or to save money. There had been accumulated during the

period of tae war a very huge backlog of demand on the part of not only

individuals but on the part of business generally, and the greatest backlog of

demand was for something that everybody wanted all at once. Those who did not

have automobiles had money or they had credit and they wanted to get car*

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im ediately. The capacity for makiiig cars, of course, could not be expanded

quickly and it would be unwise to expand an automobile industry so tn^t it

could supply ten million cars a year for & couple of years and taen what would

happen to the capacity? The whole economy would be wrecked. The same thing

has been true of housing. The Government did not understand the real nature

of the problem; as a result the Government encouraged an easy nousiug credit

expansion that created an effective demand far in excess of any possible

available supply of housing. Our capacity for building housing was not

substantially increased over what it was before the war, and it couid not

be increased readily, and yet this backlog demand was tnere. Yet the Govern

ment iramediately, under the pressure of the people of the country, took off

all of the wartime controls. They took off the allocations that were in effect

during the war on scarce materials. They took off building permits so that

you couid go out and build nearly anything. They took off wage controls. These

steps naturally led to taking off of rationing and greatly weakened expert

licensing, so that the people from countries that had accumulated dollars during

the war csjae in and paid all kinds of prices for American goods. Fabulous

profits were made in the export business. Ihen they finally took off rationing,

all that was left on was price control. Sell, price control without the

harness of other controls was worthless. About ail it did was to encourage

black markets. The price control instrument was dead six months oefore it

was repealed. I strongly advocated repeal of price control after other controls

were taken off.

Another thing that was taken off was excsss profits taxes. They tr\st

excess profit taxes on during the war to prevent war profits. Tne real war profits

are the profits that have been made since the war. The profits that have been

made since the war have be mi fantastic, as you all know if you are following the

reports of business profits. Mow those profits c.re & result of the war and they


are just as such war profits as if they were ruade during the war. the fact

that they were not made out of orders that came directly from the Government

does not mean that tney were not just as much war profits. Tne Government

necessarily deprived the public of automobiles or housing 1 during tne war

period, it the same time, tne Government created the purchasing power for

the public to buy nousing and automobiles im ediately after the war. That

purchasing power was a direct result of tne war and of war profits. Moreover,

you couidnh; avoid the first and second and third round of wages witnout an

excess profits tax in effect.

The net result of the premature removal of all the essential harness

of controls is more inflation since 1945 up to date, than we had from 1940

to the end of the war. The real inflation was not from 1940 to 1945- The

real inflation has come within the past two years with the taking off of ^11

of the controls prematurely.

fiiow this large supply of money that was created during the war and the

ease with which further bank credit could be provided were very potent further

inflationary forces. The banks have done their share to help bring about the

present inflationary development, and to that extent the law of compensation

will see to it that they pay the price. You always pay the price so etime

or other.

Since the war the only important anti-inflationary force tnat we h^ve

tiad in the economy has been the Federal budget; the Government has collected

from the public in taxes, and this includes social sec rity taxes, 14 billion

300 million dollara in excess of Government expenditures. Whereas, during the

war period the Government's fiscal policy crested the inflationary pressures,

following the war period the Government1s fiscal policy has been anti-

inflationary to the extent of over 14 billion dollars. But during tnis same

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period of time the banking system nullified and completely offset the effect

of the anti—inflationary action of the government1 s fiscal policy. The banking

system expanded bank credit and investments, other than government bonds, by

an amount equal to the debt the Federal government paid off. The banks, in

other words, created an amount of money just about as fast as the Federal

Government, through its fiscal policy, contracted the money supply.

Bank deposits did not increase, of course, during this period because as

the government paid off public debt, the banks offset that operation by a

corresponding expansion of private debt.

Mow, you say, why didnH. the Federal Beserve do soinetning to stop this

growth of bank credit? Or, perhaps, you might say this bank credit aid not

have any inflationary effect because it was necessary in order to create

production. However, when the supply of money in the hands of those that

would spend it at the end of the war exceeded our capacity to produce goods

and services, adding more money to the already excessive supply could not

produce more goods. The money that was already in existence was sufficient

to bring about some considerable inflation wit hoi A creating any more bank

credit at all. The total increase in our industrial production is not isuch

more than 30 per coot over pre-war levels. Some items went up to 100 per

cent, some 30 per cent* The total expansion of food is about a third. The

expansion of some other items is higher. But on the average, with all labor

employed and using all our productive facilities, the increase in physical

production is about 50 per cent, itoereas our money supply has expanded by

300 per cent*

le say that inflation is due to increased wages and increased prices*

That is only part of the equation. Inflation comes about first, because the

supply of money, already in existence, is in excess of tne supply of goods.

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That exerts an upward pressure on prices. Then, increased wages come about

because of an increase in the cost of living. The increased wages in turn

lead to a further increase in prices. This results in a further increase in

the cost of living. Then in order to sustain the inflation, the banks expand

credit and then profits likewise expand. So, in looking at the inflationary

cycle you have to take into account not only increased wages and increased

prices, but also tne increase in the money supply through increased bank

credit, and likewise increased corporate profits. It is all part of the

inflationary picture, and there isn*t anyone in the group that wants anything

done with hi© particular segment. Labor objects strenuously to having any

wage freeses or wage controls. Industry generally objects to the excess

profits tax or any curbing of profits. The farmer doesn*t want any ceiling

on prices, but he doe« want a guaranteed floor over a long period of time.

He wants a parity guarantee, and he has it. The banks want to be left free to

police their own affairs and decide wnether or not they will extend credit.

They don't want any interference or any curbing of further credit expansion.

And everybody wants tax reduction. Everybody got tax reduct ion. All of

the various pressure groups got pretty much what they wanted.

There are, however, large segments of the population that haven*t kept/ ■

up with the inflationary pressures, and axe worse off than they were before

the war. That means the old people who are depending upon pensions, depending

upon savings; that means the fixed income groups who have no way of increasing

or ejqasnding their income, and that means a great cany of the unorganised

workers and groups who have been unable to get increased compensation in

relation to the increased cost of living. So you have developing a very great

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disequilibrium aatong the various income groups. A great many are being priced

out of the market. They are only staying in through spending savings, by

using instalment credit, and by using easy mortgage credit. They are thus

getting some of the things that they could not otherwise get, not out of their

current income, but to the extent that mortgage end credit instalment credit

is expanding, and savings are diminishing. Even though bank credit as a whole

were to expand very little a most difficult situation is being created for the

future. Bear in mind that in the 20*s there was no inflation in prices from

19*4 to 19*9* Actually there was a decrease in the cost of living of 10 per

cent. There was very little growth in bank credit. But there was a tremendous

growth in loans on housing, in instalment credit and in the stock laarket. Too

few people got too much of the national income. They loaned it to others and

when the day of reckoning came, we had the depression of the 30*s. Kfriat is

going to happen when the mortgage housing credit falls off from around 900

million a month, where it has been running, to perhaps 300 or 400 million a

month? Shat is going to happen when instalment credit, which is running at

300 or 400 million a month; i.e., all kinds of consumer credit, when that drops

down?

I don't say there shouldn't be some indebtedness, but there should not

be a substantial growth in debt on balance* Wienever debt is growing on balance

faster than the increase in employment and production, and when, as at present,

we have full employment and production, what happens when you merely increase

the volume of credit, whether it is bank credit or not? The fact is that we

could get a substantial inflation without any further growth in bank credit

merely by an increased velocity in the existing supply of money. During a

period of inflation such as we have today, we ought to have a large Federal

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budgetary surplus which is now gone and we ought to have no further growth on

balance, or very little, certainly, in instalment credit and in mortgage credit

or in any kind of bans credit. That does not mean that you liquidate what

you have, but it means that the growth or credit extended to one group should

not be greater than the contraction made by another group. There is nothing that

the Federal Reserve can do about this. The reason why we cannot stop the

expansion of bank credit, and the reason why we cannot put pressure on is

because we cannot deny the banking system access to reserves which are the basis

for credit expansion. As long as the banks hold large portfolios of Government

bonds, as long as the Federal Reserve stands ready as the residual market,

as they must do, then control has passed from the central bank to L4.,(XX) private

banks. Individually these banks can elect to get reserves any time they

choose to sell tneir governments. Upon every dollar*s worth of governments

that they sell to the Federal Reserve, which is the residual market, that

creates a reserve dollar for the banking system upon which the banking system

as a whole can expand $6 worth of credit or new money. So that the commercial

banks, owning as they do today about 65 billion of Government bonds, could sell

six billion, for exaaple, and have 59 billion left. Upon that six billion

they sell, 36 billion dollars of additional credit could be extended. In other

words, in this way they could nearly double the present outstanding volume of

their loans. That is what the multiple credit expansion possibility is. There

is nothing the Federal Reserve can do about it. That is why since 1945 the

Federal Reserve has been pointing out this dilejsnria to the Congress in the

Board*8 reports for 1945* 1946 and 1947- I before the Taft Committee twice

last Fall, then before the Banking and Currency Committee of tne Senate, then

before the Banking and Currency Corardttee of the House. At that time and again

in April I discussed this whole question. The report that I made before those

committees at that time was sent out to all banks so I don't need to say too


much iisore chi that subject. The fact is that the potential credit which the

banking system can extend today is almost without limit.

How if the Federal Reserve System could use the powers tnat they have,

which I refer to as the traditional powers— people accuse us of seeking iaore and

more power and centralization. People who say that don*t know what they are

talking about. The Federal Reserve Syste/L, of course, has adequate powers

to stop a further bank credit inflation right in its tracks, but to do so we

would have to withdraw from support of the Government market. Ire would cease

to be the jesidual market for Government bonds. Now that is what happened after

the last war in 19*1. They stopped inflation. They raised the discount rate.

They denied the ban&s credit, and the banking system was unable to expand credit

because the source of reserves on which credit was based was denied to them.

But what happened to the Government bond market/ 4 1/2 per cent fully tax

exempt bonds went down to 83* The Federal Government p«dd 5 per cent for 90-

day paper on a fully tax exempt basis. Now that is what happened, ftnat would

it be today with a public debt of 250 billion dollars? This amounts to 60 per

cent of the entire public and private debt combined. A very large portion of

this huge public debt is held by the banking system end the insurance companies

and the savings banks and various fiduciary institutions and trust fund*. That

debt must be managed, and certc-inly the long tern, the 2 1/2 percent rate, must

be protected. You must ask yourselves what would happen to $0 some odd billions

of 1, F and G bonds held by the savers of this country if the government rate

were permitted to go up to 3, 3 l/2 or U per cent with other rates in proportion.

Certainly the whole savings debt structure would likely be converted. Holders

of the lower rate outstanding securities .ould want to go in and buy the new

•estertfclaa

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higher rate market securities. Tne Government would be faced with insur

mountable problems in its essential refunding operations. In the next five

years, some 70 billion dollars of debt falls due. How can that debt be

refunded without any certain market? le just don't believe it can. Juid

what would happen to the banks if Government bonds were permitted to8find

tneir own level®, and the level, let us say, to be 5 or 10 point© below the

present level?

As long as the Federal Reserve stands ready to support the Government

bond market, it provides money for the banks to lend. Under these circumstance#

to raise the discount rate is meaningless. So long as the short-tena rate on

Government securities is 1 1/8 per cent or more no bank is going to use the

discount facilities to get reserves. They will sell short-term Government

securities. Therefore, to raise the discount rate is purely academic. We

have advocated that the short-term Government rate should be permitted to

find its level in relation to the long-term 2 1/2 per cent rate, but there

is no point in letting the short rate go up to the point where the holders

will start selling long-term bonds and sell them short. The degree to which

the short rate can go up is a very small amount, aiaybe l/& or 1/4 of 1 per cent,

and then the discount rate can go up slightly, but that would certainly be a

minor anti-inflationary measure.

te have suggested other measures that are necessary and desirable ae

7a substitute for the traditional method of raising the discount rate and

denying the banks a market for their securities. Ihsfc we are proposing is not

more power, it is merely a partial substitute for the power that has been lost

and the power that it was meant that the central bank should have from the

very inception of the institution. Today the Federal Reserve System is unable

to perform the function for which the System was created. It is an engine

of inflation today. If the Federal Beserve System did not exist at all, if

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it were completely out of tie picture, you would have & J&icfa less inflationary

situation, because the very fact that it does exist, the yery fact that

it stands there to support the public debt is the basis for mltiple credit

expansion. It is important that bankers should recognize this fact, and

understand the proposals of the Board to deal with this problem, le certainly

have no axes to grind. Our approach is entirely objective. If our proposals

are not the way to deal with the problem of credit then the bankers should

come forth with some kind of a program that will do the job in case a

voluntary system of bank credit control does net work. The function which the

central bank was created to perform certainly should be re-established in one

lorn or another*

Now 1 am not saying that voluntary restraint won't ^ork at- all. I think

it has done some good, but it is a pretty difficult problem to get 14,0-0

competitive institutions to exercise enough restraint and self-control to

prevent a further overall credit expansion. It is a difficult thing for the

individual bamcer to deny what seems to be a perfectly sound and good loan when

he knows if he doesn't make it his competitor will. And yet that loan creates

credit, creates new money in exactly the same manner as any other kind of bank

credit, whether it is good or bad. flhen that dollar is once put out to the

borrower, especially if it is on a house and it isn't tied to a crop that

is paid off ^ien the crop ia marketed, that dollar then becomes purchasing

power for somebody else and soraeoody else and somebody else. It is in the

spending stream when it ia once created. The expansion of bank credit for

housing, the expansion of bank credit for consumer credit does not increase

production, ihat it does is to increase or sustain the demand for existing

production* That is what happens. Certainly consumer credit doea net create

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any more automobiles or any more housing. Now if you are lo an in g to a farmer

to finish h is crop and the dollar th a t you loan comes back t o you when th e crop

is marketed, th a t i s a d i f f e r e n t type of credit; o r i f you are loaning: to a

su gar company to produce a crop, or to a canning Company, or to produce &

cotton crop, and when the crop i s marketed the loan i s p a id , then th a t k ind

o f credit is self-liquidating. Btefc most of the credit which the banks are

extending today is not of that type, notwithstanding the deflationary p re ssu re s

exerted by heavy Government t a x collections from January until March amounting

to something like 7 billion dollar*, there was on balance an expansion of credit

on the part of the banking system— as I recall it was something like JOO million

dollars. Iven though there was a contraction in commercial loans there was

enough expansion in mortgage credit and in consumer credit to make an overall

expansion of credit during th a t period.

I would say to you bankers that individually you a re go in g to have to

take responsibility for what happens in your btjaks. There isn't anything that

can be done effectively on the p~rt o f the Federal authorities to stop or to

curb or to curtail or to influence your credit expansion today. There is no

chance for an effective curb on further bank credit expansion insofar as the

Federal Government is concerned, except persuasion; so if I were a banker I

would keep my loans dosm so that they did not exceed, I think, about 30 per

cent of aay deposits. As for the Government bonds that you own, that money

has already been crested and spent. The offset to the deposits that you have

against government bonds snould be held against the government bonds and you

should not reduce your holdings of Government securities for the purpose of

getting more reserves on which to expand bank credit. Mow I am speaking in

general terms. Certainly in the consumer credit field and in the bowsing field

I would be extremely restrictive. In the commercial lending field where the

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loan will be self-liquidating, *here it is tied to production, so that when

production is sold it will liquidate the loan, I would extend that kind of credit

because it will help to sustain production.

Sow I have talked here for a long while and I h^ve rambled around. As

you know, I didn't prepare a speech but I am going to say something here that

is strictly off the record. Hhat I have said is off, too, but this in particular,

looking to the future, is off the record.

There is a great element of uncertainty. ie have reduced taxes, and the

budgetary surplus that we had as an anti-inflationary foctor is gone. That ie

important, but on top of that the government has entered a program that has

apparently no terminal point of expanding the military establishment and world

aid. Ihereas we thought last year the budget of 37 billion was pretty high,

this coming year the budget calls for a minimum of UZ billions, le talk about

economy in Government, we talk about cutting public expenditures and we are

entirely unrealistic about it, because the amount that can really be cut is

fantastically small. So long as the military expenditure (which this coming

year ie 1U billion dollars) is as large as it is, and so long as the foreign

aid program is six billion or over, there is 20 billion in two items, so long

as the interest on the public debt is nearly 5 1/2 billion, and certainly if we

should do what some people asK us to do, that is, use the traditional authority

of the Federal Eeserve System, withdraw from the Government bond market, let

interest rates go up as the means of stopping credit expansion, let them go

so high that people just won't borrow, or let them go so high that you cer

tainly would stop inflation— where would the cost of carrying the public debt

go if you pursued that policy? If you did what some of the benk/^Vant it

could be ten billion dollars. Anything that you do towards increasing the coat


of carrying the „ub_i_ic debt— even 1 per cent on the outstanding public debt

is 2 i/2 billion a year, and if you increase the overall cost of carrying

the ublic debt the budget would go up 2 1/2 billion a year, so you see you ean*t

very well cut the cost of carrying the public debt on that front.

The veterans* aid program— and there seem to be no politicians in <uiy

party who would even dream of not voting for practically every veterans* program

that comes before fiim— and you h&ve a veterans* program of over 7 billion.

You have there between 3^ and 33 billion dollars in about four items!

le all *ant public roads, we want reclamation, and a great many people

want the farm aid program, they want to guarantee parity payments to farmers,

and that costs another substantial amount of money; so that as you look the

budget over you begin to see that so long as you have an expanding military

program and an expanding foreign aid program, there isn*t very much hope of

furtner cutting the budget. There is an indication and an expectation cer

tainly on the part of the military and certainly on the part of the people

who are extreme internationalists, that the budget by 1950 will reach at least

50 billion dollars. There is an expectation that the military program will

be expanded within the next two years to 20 billion a year. No* if we nave

any such expansion of the military or foreign aid program and along with that

you get some further inflation, then of course tnat means further appropria

tions by the Government to counter-balance tne inflation. Congress has just

passed a bill that will cost a good many hundred millions to take care of

Civil Service employees of the Government, to give oil of them some 300 odd

dollars to help overcome the increase in the cost of living. If we are going

to be realistic about the future we have got to fina a way of bringing about

s basis for peace in the world pretty cuick. le cannot carry out an atpanding


military program that has no terminal point, a world aid program that has

no terminal point without wrecking our domestic economy ultimately on the

rocks of inflation or without imposing during peacetime a harness of controls

that would nave to be very much more extensive than anything we ever cnew

during the war.

Now those seem to me to be the hard alternatives with which we are

confronted. It is only natural for any bureaucracy, whether it is military

or any other, or whether it is a private organization, with human nature ae

it is, to want to get bigger and better. The Navy, Army, and Air Force never

tries to find says and means of curbing or cutting or red cing expenditures.

Their attitude has always been one of finding ways and means and justificati n

for expansion. It takes civilians to curb that kind of activity. Certainly

the foreign Governments, China and the rest cf them aren't going to find ways

and means of reducing their deraands upon our Government* They are going to

try tc find ways and means of justifying and getting all that they can

possibly get. And so it is with the veterans and with everyone else. The idea

of a program on the part of the military that we call a defense program, or

a preparedness program, seems to me to be fraught with a good deal of danger*

If we had a program of preparedness for offensive rather than a program for

defensive purposes it would be another thing* Preparedness is a relative thing.

Despite hmge expenditures over a period of years we may find that we are les*

prepared in relation to Russia than we are today. Certainly the British and

the French were better prepared to deal with Hitler in '34 and fully adequate

to deal with hi* in *35# but in *39 they were unable to deal with hi*. Ihen

the Japs went into Manchuria and broke the Nine-4*ower pact we were well prepared

to enforce the peace, but when they struck us at Pearl Harbor, although we

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were much better prepared when they struck at Pearl Harbor than when they

went into Manchuria, relatively we were less prepared.

A preparedness program for defense, if it means anything, means an

armament r c . e e , and an armament r^ce has always ended in war. In war the

democracies never strike first. In the next war the country that strikes

first will have an advantage possibly superior to the country attacked,

no matter what the preparedness is, when there may be no such thing as a

preparedness or a defense against the atomic boaQ,and those who strike first

might put an end to the country they strike, and all your efiort at pre-

par edness may go to naught.

le are not living in a world or dealing with a world of old school

military preparedness, where you have plenty of time, such as was true in the

past. Hobody doubts that if we get into anotner war, it is going to be an

atomic war. It aili be a war where the one that strikes first will have a

very superior advantage. It seems to me that we are being confronted *ith the

unpleasant alternative of a regimentation of the domestic economy, which in

itself would destroy the very thing that our military preparedness is designed

to save, or an inflationary development that would likewise wreck or destroy

our system.

As a friend of mine said, it doesn*t make much difference whether you

are destroyed by your enemy or destroyed by yourself, the destruction may be

Just as complete either way.

Ihile we are vastly better prepared or could be within a very short

time, than any potential enemy, our position, it seems to me, should be used

much more aggressively than it is in the enforcement of the peace, even though

you risk getting into war you had better have an offensive preparedness with

an end point in sight th*t you are prepared to carry out than a drifting


Program of a, defensive preparedness without a terminal point. Isn*t it better

to take the chance of getting the war while you are better prepared end choosing

your own time than to wait and let the other fellow choose the time ishile you

are simply sitting by and waiting.

It is apparent, I am sure, to all of us that the United Nations has turned

out at the ^resent time to be largely a soap box. It is ineffective. It is

apparent to us that Eussia is undertaking to sabotage every effort we arein

making/the western democracies and elsewhere in the world and is making

our foreign aid program, and will continue to do so, much less effective than

it otherwise may be; that it is going to be their purpose to nake it essential

for us to continue indefinitely, without a terminal point a foreign aid program.

If they can win by forcing us to wreck, our democratic system either on the

rocks of inflation or upon the rocks of a totalitarian regimentation to prevent

it, that is just as effective as it would be any other way, and much cheaper

for Russia.

Now we had better be pretty realistic and not shut our eyes to tnese un

pleasant alternatives, and it seems to me that is just about what we are doing.

In getting back now to where I started, this generation of mine has mads a

pretty complete failure in the past. As I say, we had two world wars within the

space of 2$ years. One was not enough. And we had two depressions. The one of

th4 20*s which we thought was pretty bad, taught us nothing and we had to have

the devastating one of the 30fs and it seems to me that we have learned littls

or nothing from the past, judging from the programs that seem to be discussed for

the future.

I hate to end upon a note of *»hat might appear to be discouragement, but cer

tainly unless we face the realities of life, unless we cease to be Poliyannas, we

have very little chance of doing any better in the future than we nave done in the

past.I thank you.

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